LPL Advisor: Clients Too Complacent About Stocks

By

Michael Vallo

July 19, 2014 3:41 a.m. ET

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Jan Hobbs isn't one to jump on a bandwagon, even when a new idea becomes a pervasive part of the market. In the past decade, the number of exchange-traded funds has exploded from a little over 100 to more than 1,400. But Hobbs whittles down the list of ETFs worth owning to just three—
SPDR S&P 500
(ticker: SPY),
iShares MSCI Emerging Markets
(EEM), and
iShares Russell 2000 Index
(IWM).

"Those three are the most representative of a large asset class, and as you continue down the list they become very esoteric," says Hobbs, an independent advisor based in Orange, Calif. She adds that the benefits of ETFs diminish as they become less diversified. "The low cost is more than offset by the disadvantage of trying to pick and choose your sector."

For Hobbs, filtering out the noise, whether an overreaching investment vehicle or the cable-TV news crisis of the week, is the key to keeping her 180 clients from making bad decisions. More than half of her focus is on "modifying investors' behavior rather than managing investor assets," she says.

Hobbs, 58, has spent her entire career in her native Southern California. After studying economics at San Diego State, she got two M.B.A.s: one in finance and another in entrepreneurship from the University of Southern California.

In 1984, Hobbs started with a broker-dealer that promoted master limited partnerships and tax shelters. Unhappy with the concept of "pushing product," she and a group of colleagues joined Boston-based Linsco, becoming the company's first West Coast advisors. Linsco later merged with Private Ledger to become LPL Financial. Hobbs remains affiliated with the successor firm.

Hobbs has appeared frequently on Barron's annual list of the top 100 women advisors, most recently at No. 96 in 2013.

Her biggest worry right now is her clients' lack of concern. "Everybody's quiet. Not a good sign," she notes. While she believes stocks aren't overvalued and U.S. equities remain the best asset class, she frets that "complacency means we're ripe for a surprise."

"In just a few weeks of July and August 2011, we had a 17% correction in the S&P because ostensibly people were worried about the credit rating of the U.S. government," says Hobbs. "It doesn't take much to get that going when we haven't had it in a while."

One way she's preparing clients for the next correction is through the
Wells Fargo Advantage Absolute Return
fund (WARAX). It's designed to generate positive returns under all sorts of market conditions but especially to preserve capital in a down market.

Hobbs devotes half of her typical asset allocation to equities through mutual funds and ETFs with a heavier weighting in U.S. stocks for the "safety factor." Right now, however, emerging markets have the most attractive valuation, she says. Two emerging-market funds in her portfolio are the
Oppenheimer Developing Markets
fund (ODMAX) and the
Virtus Emerging Markets Opportunities
fund (HEMZX).

Another 40% of a typical allocation is made up of "protected equities." These include structured products, which use derivatives to form a buffer against losses, and annuities that provide a guaranteed minimum income for life. Just 10% of her typical allocation is in fixed income, where she favors short-term bonds.

HOBBS SAYS THE MOST important preparation for a correction is psychological, and she's already crafting her message.

In December 2008, during the darkest days of the financial crisis, Hobbs and her six-person team reached out to clients, sending each a holiday gift bag containing everyday products like batteries, tissues, and tape made by companies they owned. Also included were company profiles and their earnings history.

"It helped for them to see what they really own, what these companies really do, and what they're trading at now," she says. The conclusion was to buy more, rather than get out of the market. Since December 2008, the Standard & Poor's 500 is up about 119%.

The idea was such a hit that Hobbs now uses a new theme each year to highlight different holdings or illustrate investment ideas. Examples include sustainability and "buy American."

What's the next theme? Right now, she's planning to highlight emerging-market strengths, such as the lower cost of manufacturing in China and the rising technology industry in India. Sentiment may have soured on some BRIC countries, but the independent-minded Hobbs believes in the opportunity and knows the best way to convince clients is to demonstrate the markets' most positive attributes.

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